When planning for retirement it's important to include health care costs. / Thinkstock

by Rodney Brooks, USA TODAY, USATODAY

by Rodney Brooks, USA TODAY, USATODAY

Many people nearing retirement don't have a good feeling about whether they have saved enough to make it through retirement.

Add to that worries about health care costs in retirement, and those concerns are off the chart. They should be.

"I've seen people pay as much as $5,000 to $15,000 a month for their medical care in retirement," says Katherine Dean, national director of wealth planning for Wells Fargo Private Bank.

According to the Employee Benefit Research Institute's annual survey, more than half of retirees surveyed this year are not confident that they have saved enough to pay their medical expenses during retirement.

EBRI says the average 65-year-old couple in retirement should expect to pay $163,000 in out-of-pocket expenses for health care, excluding long-term care. And even then, they have only a 50% chance of covering their actual costs. Add to that the annual rate of inflation for medical expenses of 5% to 7% for health care expenses.

So, how do you plan for that?

Start with two simple steps, Dean says. "There needs to be a better acknowledgement that paying for health care in retirement is a pretty major issue and something they need to incorporate as part of their (financial) plan. The next step is to do an estimate as to what these costs will be and incorporate it into the plan."

What Dean says you need to consider in your estimate: how soon you want to retire, how long you can expect to live, your current health status, the cost of medical care in your area, whether you will receive any employer health benefits and inflation.

Start with an honest assessment of your current health care costs. "Break it down," says Kimberly Foss, founder of Empyrion Wealth Management in Roseville, Calif., and author of the book Wealthy by Design. "If you are 55 or 58 and you have significant health issues, you need to figure out what those costs are now and apply them to retirement."

For instance, Foss says she has a client who is 51 and has significant health issues - not life-threatening, but significant. She's already spending $1,500 a month ($18,000 a year) for health care premiums. "That's 20% of her living expenses on health care, and those issues will not go away in retirement," Foss says.

Medicare won't kick in until she's 65, and even then she will still need to cover 40% of her medical costs out-of-pocket.

Foss says she has to build additional returns into her client's portfolio to prepare for retirement. While normally she may seek a 4% to 5% return for a client's portfolio, she may have to aim for 5.5% to 6% if there are health issues.

"Be proactive, and be prepared," Foss says. "Health care should be specified out and should be earmarked in the portfolio because of the exorbitant amount it costs today."

Some other alternatives to help with health care in retirement:

â?¢ Long-term care insurance. Planners say people also need to consider that they might need long-term care. And then they need to figure out if long-term care is an option.

"Do you want to purchase long-term care insurance, or do you want to self insure?" asks Dean. "That can be $50,000 to $100,00 a year, with most people needing those service for two to five years."

Bob Fragasso, CEO of Fragasso Financial Advisors in Pittsburgh, is a proponent of long-term care insurance, starting in pre-retirement. He says there is a 50% chance that someone in retirement will need long-term medical care.

Foss says she doesn't necessarily recommend long-term-care insurance for her clients in their 50s, but if they have it they should keep it. One of her clients was just hit with a 70% increase in premiums. But she does recommend that people think about and plan for long-term care.

â?¢ Health Savings Accounts

"One of the essentials that many consumers should be aware of is health savings accounts," says Natasha Rankin, executive director of Employers Council on Flexible Compensation.

HSAs are tax-advantaged accounts and can be transferred from employer to employer. If you retire, you can continue to contribute, until you qualify for Medicare or another health plan. But they are currently offered by only 30% of employers. And you must have an employer-sponsored HSA if you are to carry it into retirement. Current limits for 2012 contribution at $3,250 for single coverage and $6,450 for family coverage.

The advantages, according to Rankin: "They are portable. They are owned by an individual. They are always paired with a qualifying high-deductible health plan. The advantage Is that balances roll over from year to year. They allow participants to prepare for health care costs and long-term care later."

Whatever path you choose, planning is key, the financial experts say.

Fragasso says his firm makes sure all his clients have adequate health insurance and guides them to providers if they don't. "We also test their assets to see if one person has to be placed in custodial care, and the other at home, whether their assets will support that. They still might wish to buy that long-term care as estate preservation."

"What they can do beyond financial planning is better healthy behavior," says Jean Setzfand, AARP vice president. "There are so many things you can do in preventative care that can reduce your lifetime costs." Also, she says, AARP is working on an online calculator that will help people with those estimates. That should be available later this year.